Macroeconomic Modelling and the Effects of Policy Reforms: An Assessment For Italy Using Item and Quest

Abstract

In this paper we compare the dynamic properties of the Italian Treasury Econometric Model (ITEM) with those of QUEST III, the endogenous growth model of the European Commission (DG ECFIN) in the version calibrated for Italy. We consider an array of shocks often examined in policy simulations and investigate their implications on macro variables. In doing so, we analyse the main transmission channels in the two models and provide a comparative assessment of the magnitude and the persistence of the effects, trying to ascertain whether the responses to shocks are consistent with the predictions of economic theory. We show that, despite substantial differences between the two models, the responses of the key variables are qualitatively similar when we consider competition enhancing policies and labour productivity improvements. On the other hand, we observe quantitative disparities between the two models, mainly due to the forward-looking behaviour and the endogenous growth mechanism incorporated into the QUEST model but not in ITEM. The simulation results show that Quest III is a powerful tool to capture the effects of structural economic reforms, like competition-enhancing policies or innovation-promoting policies. On the other hand, owing to the breakdown of fiscal variables in a large number of components, ITEM is arguably more suitable for the quantitative evaluation of fiscal policy and the study of the impact of reforms on the public sector E10, Cbalance sheet.

Keywords: Economic Modelling, DSGE, Structural Reforms, Italy

JEL Classification: E10, C50, E60